Citrix preaches 'second mover advantage' over VMware

Analysis Pop quiz. You’re a $7bn software company that has all the sex appeal of a shy potato. What do you do?

Buy XenSource, of course.

In August, Citrix dug deep and found $500m to acquire XenSource – a company expected to bring in all of $8m this year, according to our sources. In an instant, this deal transformed Citrix from a very competent, well-paid, niche application streamer to a major player in the most-hyped part of the server and management software markets. People who had no idea what Citrix actually does took notice and wondered how this company will fair against an upstart like VMware and a lumbering giant like Microsoft.

Wes Wasson, Citrix’s Chief Strategy Officer, sees the XenSource buy as the culmination of a multi-year charge. The software maker has acquired companies such as Netscaler, Teros, Reflectent, Orbital Data and Ardence as it looked to build out the bits and pieces that surround its core application delivery technology. With XenSource, Citrix completed this push, adding technology that sits at the very heart of the data center. Now, according to Wasson, Citrix is well poised to continue its mission of becoming a "successful, multi-billion dollar software company."

"We really have been on a three year plan of building that vision out," Wasson told us, during an interview at Citrix's Santa Clara headquarters. "I think what you saw in XenSource is the final piece. If you didn't quite see what we are building over here in the corner, then this acquisition really hit the floodlights on it."

The new kid in town

Citrix claims a number of unique angles in the virtualization game that could give it an edge over the competition.

For one, it has a long history doing virtualization-type things by pushing shared software out from the server room onto users' desktops and making that a tolerable experience. More recently, Citrix rolled out a full-on Windows desktop virtualization product that lets it grab entire desktops and application bundles. Earlier this month, Dell also picked up the technology Citrix acquired from Ardence to let customers manage up to 100 full PC desktops on a server and send out those operating systems and applications via the network.

So, we find Citrix working its virtualization play, primarily with Windows, from the desktop out angle, while the big names in virtualization VMware, Microsoft and XenSource have done more of a server-centered thing so far.

Secondly, Citrix thinks it can engineer some interesting tactics on the pricing front that the server guys might not try.

Wasson declined to offer any specifics on how Citrix would shake up virtualization pricing but did say that the per processor model used by VMware and XenSource historically might not be the company's favored approach. Citrix is intent on "providing customers with things that can be consumed in easier and far more economical ways," according to Wasson. We tend to think that means sending virtualized software out on a per user cost basis rather than metering by the socket. Or perhaps you receive a discount for doing both desktop and server virtualization.

Buying fame: A pricey adventure

While Citrix may be a grizzled "virtual" player courtesy of its streamed application expertise, there's no question that VMware is the dominant virtualization player right now. VMware appears to have no intention of resting on its server-side laurels and has already shipped a number of desktop virtualization products. In addition, you'll find start-ups such as Pano Logic - run by a former XenSource CEO - teaming with VMware on desktop streaming.

Citrix paid $500m for the chance to go after VMware on all fronts, and that price looked - and still looks - high to us. At the same time, VMware's market cap has irrationally surged to $39bn, so, if Citrix can tap into just a fraction of the insanity, it should look like a real winner.

"In three or four years, they will say the price was a bargain," Wasson said. "The technology of virtualization is so empowering that history will vindicate us on that front."

VMware's greatest strength at the moment is its rich product portfolio that surrounds its core hypervisor technology. Of all the "others" out there, XenSource appeared to Citrix as the only real contender capable of matching VMware's product spread in the near term. To that end, XenSource recently rolled out Version 4.0 of its flagship software and complemented the code with management packages that meet - and in a couple of cases beat - some of VMware's similar products. Microsoft will fail to make such claims next year when it ships a revamped virtualization platform that lacks key tools such as the ability to move virtual machines around physical servers. (Both VMware and XenSource have this XMotion function.)

And, even with companies such as HP and IBM making a killing off VMware and others like Intel and Cisco investing in the company, the large hardware players want a real threat to VMware's dominance, according to Wasson.

"When you look at companies like Intel, HP and IBM, people at the highest levels of the company are heavily invested in making sure this is not a one horse race," he said.

Even though HP, IBM and Dell have all announced support for VMware's embedded ESX 3i hypervisor and none of the vendors have announced support for XenSource's comparable product, Wasson thinks it's only a matter of time before XenSource gets equal play.

"You will have every major server system ship with probably both VMware and XenSource embedded," he said.

Being even more brashful, Wasson claims Citrix - thanks to XenSource - already has the more attractive story for large OEMs.

"VMware is very strong in data centers, but (the hardware vendors) see Citrix as having this broad end-to-end play," Wasson said. "VMware does not have that today and will probably have a hard time building it."

Partnering VMware to death

Wasson is also pumping the notion that Citrix has a "second mover advantage."

VMware, for example, built its own file system to support many complex virtualization tasks. Company executives that we've talked to see this file system as a major advantage. VMware has spent seven years fine-tuning the code, and can pull off some neat tricks with moving files between systems as a result.

Citrix, however, argues that customers don't want to pick up a new file system when they're used to popular code already out there on the market. That's why XenSource forged a partnership with Symantec around the Veritas file system to allow for a certain level of storage virtualization.

Why build everything from scratch if you don't have to?

"You will see many, many other partnerships in similar areas," Wasson said. "In most cases, it's what customers want to do anyway. The better way to deliver this technology is through partners."

Mama Microsoft

And, of course, Citrix's biggest partner to date is Microsoft, which seems set on teaming with Citrix to clobber VMware any way it can.

The Microsoft relationship - where the two companies support and often sell each others' software - is a delicate one. You could see Redmond chumming up with Citrix until its own virtualization business starts to improve. Then, it's "so long, thanks for the memories."

In reality though, it just may be the case that Microsoft never gets this virtualization thing quite right. It's shown no indication of having the technology down so far. So, two years from now, Microsoft may be eating Citrix for, say, $12bn, making the XenSource purchase look awful cheap indeed. ®